March 16, 2012

Is there a formula to replicate success?

Many companies incorrectly assume that they can replicate their
developed world success in emerging economies, by starting off simply
building on their developed model of the business. Of course, they
finally get their arms around what aspects to change and what not to, in
the new market, but it takes an inordinately long time with several
rounds of trial and error.

The gap lies in what is best explained as the "institutional void" propounded by Harvard Business School Professors Tarun Khanna and Krishna Palepu. Put simply, these are a company's "blind spots," when they do what they think is a careful analysis of market potential in an unfamiliar venue.

For instance, in countries without a strong capital market and governance structure, even the largest businesses need not make their financial statements public. How can a foreign entrant possibly conduct a competitor analysis without this information? Similarly, if this company chooses to go to a country where the education system is not industry-ready, it has little chance of quickly finding the right kind of talent that can be readily harnessed to drive business.

Institutional voids are often the reason why a $10 billion corporation in the U.S. cannot build a similar business in China, using its familiar model for success. No doubt, some elements of the original model still apply to the emerging market context - such as expertise in managing the complexities of business - but there are simply too many differences on the ground, all of which suggest a failure of a one-to-one replication.

Imagine that a hypothetical successful American corporation is planning to enter an emerging market. During its 50 years of existence, the company has, no doubt, developed explicit capabilities within its organization in the areas of finance, human resource management, manufacturing, product design and development, and so on. In all likelihood, it has also nurtured explicit relationships with partners, suppliers, customers and other members of the ecosystem. But it may not have given the same attention to all those implicit relationships - with regulators, lawmakers, analysts, rating agencies, professional associations and media, to name a few - that it relies on or takes for granted.

That inattention could change very quickly should the company find that some of these institutions are absent in its target market. For instance, a corporation, accustomed to screening customers in the U.S. based on the credit scores provided by ratings agencies, will find that it is tougher to get similar information in China. Or the enterprise may discover, at a significant cost that the judicial system in India could take years to decide a case, which back home may be mandated by law to be resolved within 30 days.

The prepaid mobile business in India, China and several countries of Africa is a case in point. Telecom companies couldn't possibly apply, to these countries, the postpaid model - which was so successful in the U.S. where it is easy to ascertain a customer's creditworthiness. So they negated this constraint by coming up with a prepaid model. And despite the subsequent proliferation of network operators, those who got into the market first gained the most.

Here's another example. Consider Infosys' acclaimed educational campus. It has cost the company the equivalent of a space shuttle launch to build its training center. But this was a response to a shortage of adequately trained, motivationally aligned, business-ready human resources in India. Today, spurred by the huge competitive advantage this creates for Infosys, it is a clear model that others are seeking to emulate. Companies that move first to close an institutional void through meaningful innovation create breakthrough advantage for themselves, and erect barriers that their rivals take years, if ever, to overcome.

Can success be replicated? Of course. But it will only come to those companies who make the effort. The institutional void is a barrier. But once you break through it, the rewards - as a first market mover and innovator - are clearly there.